BORROWERS face being questioned over their monthly spending on clothes, utilities and childcare under tough new rules designed to tighten up the mortgage market.

BORROWERS face being questioned over their monthly spending on clothes, utilities and childcare under tough new rules designed to tighten up the mortgage market.

The rigorous new laws, proposed in a report by the Financial Services Authority published today, are designed to prevent the return of irresponsible lending to those not sufficiently financially secure to buy a home.

The proposals have been welcomed by lenders, but there are fears they could exacerbate the problems for first-time buyers already struggling to get on the housing market.

The influential Council of Mortgage Lenders (CML) said it had feared the plans would harm consumers and lenders, but said it was satisfied the FSA had listened to its concerns and was providing “sensible safeguards”.

CML director general Paul Smee said: “Lending needs to be responsible and done in a way which protects consumers.

“Rules need to be practical and avoid unintended consequences.

“Whilst there is much detail to be pored over, the FSA’s new proposals seem to strike broadly the right balance.

“If lenders are to make their contribution to improving the supply of housing and to the wider agenda for economic growth, then they need a regulatory framework which also supports that objective.

“We look forward to working with the regulator to iron out any remaining wrinkles and to move towards a smooth process for implementation.”

And Peter Owen, head of member services at Principality Building Society, said the new measures “strike the right balance between practicality, flexibility and protection for the borrower”.

He added: “As always, the true impact for lenders and borrowers will emerge through the detail, but in principle we find the report encouraging in preventing a recurrence of past issues.

“As a mutual building society, we have always taken a prudent approach to lending and we do not expect to have to implement significant changes to our policies as a result of the review.

“The measures are proportionate and justified and appropriate to the needs of lenders and consumers.

“In short, they formalise regulation that the majority of lenders have already moved towards in the current climate.”

Under the new proposals, mortgage applicants will have to list their monthly spending on clothes, utilities and entertainment.

The new regulations are designed to help address the problems in the industry which led to mortgages being offered to people who struggled to afford them.

The FSA estimates that of those taking a mortgage between 2005 and 2010, 15% are in negative equity.

The regulator is concerned that while low interest rates have helped some borrowers, there are “real dangers” that problems are being stored away for the future, with home owners being unable to meet repayments when rates start to go up, an increasing number of mortgages carried over into retirement and over a million interest-only mortgages near maturity.

Important changes include an end to self-certified mortgages and the designation of interest only mortgages as a “niche” product which can only be advanced when there is a credible plan to start repaying the underlying capital.

Self-certification mortgages have sometimes been dubbed “liar loans” because applicants declare their own earnings.

Explaining the reasons for the changes, the report said: “While risky, lower-quality lending may currently be restricted, there is a real danger that, as funding comes back into the market and lending starts to pick up again, there will be increasing pressure on firms to consider higher-risk lending and focus more on market share than maintaining lending standards.”

The report stated that its calculations showed that some 1.5 million interest-only mortgages worth around £120bn will be due for repayment in the next 10 years.

It added: “The risk of an increasing number of interest-only mortgages reaching maturity without adequate repayment strategies is likely to pose a significant challenge for both consumers and lenders alike over the coming years.”

However, the regulator will not seek to restrict interest only mortgages for those who already have one or are unable to meet repayments on existing repayment mortgages.

Other requirements include an end to accelerated mortgage approval, meaning that all mortgage applications, even those processed online, must be assessed individually with mortgage companies taking into account net disposable income after deductions for items such as clothes.

Lord Turner, chairman of the FSA, said: “We believe that these are common sense proposals which serve the interests of both lenders and borrowers.

“While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”

Nick Davies, director of Cardiff estate agents Nicholas Michael, broadly welcomed the reforms, but warned they would do nothing to address the difficulties which first-time buyers experience.

“More detail about net income is a good thing, although there is a risk of over-egging things and turning it into a form of means testing,” he said.

“Although describing interest-only mortgages as a ‘niche product’ is probably right, it is important to have that product available because it suits certain people and certain circumstances.

“It makes sense that the FSA is trying to close the door on the lending policies which got us into the mess we are currently in. However, first-time buyers are still a real hole in the market and are receiving very little help from the Government.

“Abolishing the temporary stamp duty exemption, for instance, was madness. It is all very well encouraging first-time buyers to buy new builds, but what about the second hand market?”

Andrew Baddeley-Chappell, head of mortgage strategy and development for the Nationwide building society, added: “The current mortgage market is fragile and growth is relatively weak.

“With this in mind, we question whether now is the right time to ask the industry to divert its focus onto further regulatory changes.

“Even more regulation, expected from the EU, is likely to result in further changes to the regulatory framework. It would be far better for the UK and European regulation to happen at the same time.”

Campbell Robb, chief executive of homeless charity Shelter, said: “Unaffordable, reckless lending caused misery to thousands of homeowners who ended up falling behind on mortgages they had no hope of paying back, leaving them to face eviction and homelessness.

“We urge the FSA to implement these measures swiftly so we can put an end to irresponsible lending once and for all and ensure no-one else has to needlessly go through this nightmare again.”

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